Yuan at three-month high

The yuan hit a three-month high in benchmark offshore one-year non-deliverable forwards (NDFs) on Monday after China's strong trade data for December, showing the economy was in a full recovery and adding fresh pressure on Beijing to allow the Chinese currency to rise.
But the yuan may have limited room to gain sharply in key NDFs in the near term, dealers said, as China has shown no signs yet of letting up on its stable yuan policy despite robust trade data. Offshore one-year dollar/yuan NDFs were bid at 6.6010 late on Monday, rebounding from earlier lows of 6.5750 bid in the late morning, its lowest level since October 20. It was down from Friday's close of 6.6070.
Twelve-month yuan appreciation implied by NDFs fell back to 3.43 percent measured from the Chinese central bank's daily mid-point compared with the morning's lower level. Implied appreciation was at 3.34 percent at Friday's close. The NDFs implied yuan appreciation was last highest on October 20 when it stood at 4.55 percent. "Dollar/yuan NDFs mostly sold off due to the recovery story," said an NDF trader in Singapore. "(I) don't think people have many other ideas right now."
Several dealers in Shanghai said hedge funds and some foreign banks took short dollar positions on Monday, making trading relatively active in the early morning. However, dollar short-selling mostly died down when the NDFs hit their lowest in nearly three months, implying limited potential for the NDFs to fall further right now, they said.
"I don't think the PBOC will allow the yuan to resume appreciation in the first quarter, and that will limit the rise in the value of the yuan in NDFs," said an Asian bank dealer. "December trade data was good, but the government apparently won't decide currency policy by a month's data."
The People's Bank of China (PBOC) set the yuan's daily mid-point against the dollar at 6.8275 on Monday, only four-pips lower than 6.8279 on Friday. The mid-point is the central bank's reference rate from where the yuan can rise or fall only 0.5 percent in a day.
Dealers said the PBOC fixed the yuan's mid-point slightly higher on Monday largely because of the US dollar's fall on global markets. Growth in China's exports and imports last month blew past expectations, providing fresh evidence of the vigour of the economy, with exports alone leaping 17.7 percent from a year earlier, dwarfing the 4.0 percent rise forecast by economists.